IMF on Covid-19, debt vulnerabilities

BY: graphic.com.gh
• Dr Albert Touna Mama — Resident Representative, IMF to Ghana

The Daily Graphic (DG) engaged the Resident Representative of the International Monetary Fund (IMF), Dr Albert Touna Mama (ATM), for its views on the government’s management the COVID-19 pandemic, the fiscal situation and its role in economic management after the end of the extended credit facility programme in 2019. Below are excerpts of the Fund's response, which was sent last Friday.

DG: Ghana and the world at large ended the first full year of the COVID-19 pandemic this month. What is your assessment of the extent of damage of the pandemic on the domestic economy and how will you rate the government’s response so far?

ATM: Ghana has done well to manage the COVID-19 outbreak. The government has set clear objectives from the outset and had an effective communication around its response.

The outcome is commendable. The private sector has also stepped up to the plate with the construction of the Ghana Infectious Disease Centre and now with the PVAX Project to procure vaccines.

Finally, from the 'pooled testing' approach to the rapid sequencing of the COVID-19’s genomes, Ghanaians should be proud of their scientists’ contribution to the response.

On the economic front, both the government and the Bank of Ghana (BoG) have also been very proactive.

Their response has helped limit the collapse in economic activity—with real GDP growth estimated at 0.9 per cent in 2020. This should allow for a faster recovery starting from 2021, but the socio-economic impact may still be significant.

For example, think about what the potential consequences of schools’ closure on the youth could be. In addition, the impact is expected to be both significant and disproportionate on the tourism and hospitality sectors as well as the informal sector (especially for female workers).

Unfortunately, the government’s response to the pandemic has come at a huge cost with a fiscal deficit estimated at -15.6 per cent of GDP (including energy sector payments and financial sector clean-up costs) while debt jumped to 78 per cent (including the ESLA bond) at the end of 2020.

The pandemic has left public finances in a bad enough shape that the government will have to pursue an aggressive consolidation strategy to put finances back in order.

DG: What is your assessment of the situation the government finds itself in?

ATM: The government is confronted with the triple challenge of achieving herd immunity against COVID-19, stimulating the economic recovery, and servicing public debt.

While these challenges are perfectly aligned, they are also competing for the fiscal space.

On the one hand, achieving herd immunity would allow to lift restrictions on mobility and social gathering, and boost the economic recovery. In turn, this would improve government revenues and make it easier to service its debt.

On the other hand, managing subsequent waves of COVID-19 spread and rolling out mass vaccination continue to cost money—around GH¢1.2 billion for vaccines only.

In addition, the government’s contribution to economic recovery (Ghana CARES programme) is estimated to cost around GH¢10 billion per year.

Finally, servicing public debt would cost GH¢51 billion per year. The government is caught between a rock and a hard place.

DG: Parliament approved the suspension of the fiscal rules in August last year, making it possible for the government to incur deficits in excess of the five per cent of GDP threshold until 2024 when the government hopes to revert to the ceiling. How optimal is this timetable? Could we not have done it earlier than that? How sufficient and robust is the fiscal consolidation plan in stabilising the debt levels?

ATM: It is the right things to do to anchor the fiscal consolidation plan around its impact on public debt. The government’s programme aims at stabilising debt starting from 2025, when the primary deficit is expected to be positive.

Certainly, a faster and larger fiscal adjustment will be desirable because it would stabilise the debt before 2025 or even start reducing it altogether, and also create buffers for possible shocks.

However, the important question is whether a faster and larger fiscal consolidation path is both socially and politically feasible.

It will take a national stakeholder consultation to respond to this question.

DG: The government introduced some tax measures to raise revenue and this fits well with the Fund's earlier proposition that the fiscal burden could be shared with the sections of the public not hardly hit with the pandemic. How prudent is the targeting, especially given the protests that have greeted them?

ATM: The issue with taxation is never whether the government should raise taxes but 'when' and 'how.'

At the end of the day, there is no such thing as a 'free lunch' in economics. A fiscal stimulus today would eventually require a tax increase tomorrow. Economists call this concept the 'Ricardian equivalence.'

There has never been better justification for resourcing the government than after the COVID-19 pandemic.

As it has become apparent, countries with greater capacity to collect revenues domestically have also been the countries better placed to support health systems and protect people from losing jobs and incomes and sparing companies from bankruptcies.

For example, advanced economies have been able to run fiscal deficit at 13.3 per cent of GDP in 2020, with government revenue at 34.8 per cent of GDP in 2020.

Certainly, plugging revenue leakages and expanding the tax base should be central to the domestic revenue mobilisation strategy.

Be that as it may, the many leakages from tax exemptions remain the “Achilles’ heel” of all efforts to improve tax collection, with between three to five per cent GDP per year in uncollected revenues.

For instance, an estimated GH¢5.3 billion was lost in 2018 from exemptions to just import duty, import VAT/NHIL, and domestic VAT (not counting income tax, etc.).

At the minimum, we should start capturing these leakages in the budget documents.

The bottom line is that as painful as it is, the government is doing the right thing in starting to raise tax revenues—which are below 13 per cent of GDP.

But there is room to make the tax revenue mobilisation efforts in this programme more progressive and to share the burden of fiscal consolidation more fairly.

DG: Do you find the tax measures sufficient enough to raise the needed revenue to prosecute the budget and anchor the consolidation path?

ATM: The size of the fiscal adjustment depends on the objective of debt stabilisation or debt reduction the government is seeking to achieve. The programme presented to Parliament sets to stabilise debt starting from 2024 onward.

The main challenge would likely be for the revenue measures in the budget to generate the intended yield.

Over the years, revenue projection over-optimism has been a problem, leading to downgrading projection during the mid-year budget review and again at the time of the presentation of the next budget.

Usually, the main challenge comes from tax administration measures.

There seems to be a determination to buck the trend this time on the back of the merger between the tax identification numbers (TIN) with the National ID.

There is no doubt this will payoff eventually, but it is hard to determine whether it would be this year.

DG: The Bank of Ghana (BoG) said in its March Monetary Policy Committee press statement that the budget and the fiscal consolidation it hopes to pursue were overreliant on revenues, posing a risk to its integrity. That is a genuine concern, is it not?

ATM: This is a genuine concern. The composition of fiscal consolidation, whether spending-based or tax-based, is important.

There is merit in reviewing all public expenditure with the view of rationalising them and improving their efficiency.

In fact, one desirable outcome at the end of this programme would be to reduce spending rigidities in the budget.

One caveat is that spending on education, health and social protection ought to be safeguarded.

This is also a way to avoid imposing undue burden on the less well-offs in the society during fiscal consolidation.

DG: A section of society feels that these tax measures could undermine growth, given that they risked weakening demand and the capacity of businesses. How sufficient are the counter

measures (the rebates) to mitigate the cost on the economy, given the peculiarities of the situation?

ATM: It is a legitimate concern whether fiscal consolidation will not affect economic growth. As already indicated, the major fiscal expansion in 2020 has helped cushion the collapse in economic activity and allow for rebound from a higher base.

In some respect, the government has front-loaded its support to the economy, but let us also keep in mind that the budget deficit for 2021 is still very large, so it continues to provide support.

At the same time, it is appropriate to start focusing on restoring the health of public finances.

DG: The debt stock has risen to GH¢291.6bn, equivalent to 76.1 per cent of GDP in 2020 from GH¢218.2bn equivalent to 62.4 per cent of GDP in 2019. Interest payments in nominal terms and as a ratio of revenue have also gone up significantly. How much of a threat is the debt situation to the economy? You work in other countries and so are knowledgeable of the impact of the pandemic on other economies, particularly the fiscal sector. It appears that in terms of fiscal impact, the impact has been greater in Ghana than peer countries, especially in terms of debt. What accounts for that?

ATM: Ghana already had elevated debt vulnerabilities before the pandemic but what the pandemic has done is really to make it worse. Debt servicing has now surpassed public revenues.

It needs to be addressed by markedly improving domestic revenue mobilisation and reducing debt service.

The government’s intention to conduct liability management operations with the proceeds from the upcoming Eurobond issuance is a step in the right direction.

DG: The government has unveiled the Ghana CARES programme, a GH¢100 billion initiative to help mitigate the impact of the pandemic and build back. It says that GH¢30 billion will be raised from the public sector and GH¢70 billion from the private sector. How realistic is this within the four-year period?

ATM: The CARES programme has the potential to be transformative for the Ghanaian economy. It certainly sets very ambitious domestic revenue mobilisation targets. From a debt sustainability point of view, the important thing is to sequence public investment in accordance with the available fiscal space.

Attracting private investment is critical to the success of the CARES programme. It hinges on safeguarding macroeconomic stability and improving the business environment, among others.

DG: How realistic is the five per cent growth target for the year? Also, the petroleum sector did not impress last year. How can we stimulate it beyond the natural recovery path it is on?

The main challenge to economic activity in the near term is the resurgence of new waves of COVID-19 spread and the pace of the mass vaccination rollout.

Ghana has done comparatively well on both front. Therefore, given the expected rebound in many sectors that have slowed down in 2020, a five percent growth is not out of order, albeit with some downside risks.

We at the Fund project economic growth to be slightly lower at 4.6 per cent in 2021.

DG: The country is in the market preparing to raise up to $5 billion. It will be our eighth excursion within which we would have raised a minimum of $15.2bn since debuting in 2007. Our overreliance on the international capital market obviously poses challenges to the external sector, especially given the impact on foreign interest payments and the indicators thereof. What is the Fund's position on it?

ATM: The over-reliance on borrowing is born of necessity, whether from the local bond market or from the International Capital Market.

It is a fact that public revenues are not enough to service public debt. Therefore, the government must borrow to continue to service its debt and to function.

It points to rapidly growing financing needs over the last three years, including of course first of all because of the pandemic but also energy sector payments, financial sector bailout costs.

Unfortunately, efforts to improve domestic revenue mobilisation have not been commensurate with the growing financing needs even though the measures in the 2021 budget are an important step in the right direction.

We are hopeful that these efforts will continue. We also continue to work with the Ministry of Finance and with the Ghana Revenue Authority on these issues.

DG:The Auditor General, Mr Daniel Domelevo, was retired this March. What do you make of the circumstances leading to his retirement?

ATM: It is important that the Audit Service remains a strong institution and follows up on the outstanding reports.

Two tasks will further test that strength: the audit of arrears incurred in 2020 and the audit of the emergency spending related to the coronavirus crisis.

We all know the system is not yet perfect and we all thrive to improve it.

After all, a good audit of the state’s money is also part of the fiscal consolidation efforts besides being a critical piece of the management of public finance processes.

DG: The Economic Intelligence Unit (EIU) of the Economist Magazine predicts that the deficit ceiling will be scrapped in the lead up to the 2024 elections and we presume that is premised on our history when it comes to sticking to fiscal discipline in election years. Do you share that view? How sustainable is the fiscal rule in the face of emerging challenges?

ATM: The government’s fiscal consolidation efforts would have been a success if by 2024 the deficit ceiling is already re-instated and respected. That’s why it is important to perfect the fiscal consolidation plans today. Apart from that, 2024 is far away and these predictions seem to me just speculations.

DG: The IMF Managing Director issued a statement recently relating the IMF Executive Board’s support for special drawing rights (SDR) allocation of $650 billion. How much and when is Ghana to receive its share of the allocation?

ATM: This is a key step to ensure all our country members, particularly those hardest hit in the crisis, have higher reserve buffers and more capacity to help their people and support economic recovery.

Now that the IMF Executive Board has conveyed broad support, the IMF Board of Governors needs to approve it. Approval by the Board of Governors requires a majority vote of at least 85 per cent of the total voting power.

So, we will need to see what the Board will decide, and how the process is going to be designed.

DG: President Akufo-Addo won a reelection bid in December and is now in the first days of his final term. What is the Fund's expectations of him in a term that he will not be eligible for elections?

Well, I think for any leader in the world at these times, the most important thing is how we come out of the global pandemic of COVID-19.

This is the worst peacetime recession since the Great Depression.

We certainly wish His Excellency the President success, good fortune, and firm health as he continues to conduct the destiny of Ghana.

Pull quote

Two tasks will further test the strength of the Audit Service: the audit of arrears incurred in 2020 and the audit of the emergency spending related to the Corotations crisis

Number crunch:4.6% growth

We at the Fund project economic growth to be slightly lower at 4.6 per cent in 2021.